Zhu, K., and B. MacQuarrie, 2003, ��Economics of Digital Bundling: The
Impacts of Digitization on the Music Industry,"Communications of the ACM, 2003, Vol. 46, No.
9, pp.264-270.

The
Economics of Digital Bundling:

The Impact of Digitization and Bundling on
the Music Industry

Kevin ZhuandBryan MacQuarrie

In the last few years, electronic distribution of compressed
digital audio files has been gaining momentum.The proliferation of digital music, the
exploding popularity of MP3 format, and the emergence of the Internet as a
viable distribution medium have disrupted the existing music format, pricing
and distribution standards. This has led to a popular belief that this digital
transformation is the beginning of a sweeping change in the industry �C the
power of current players will be destroyed and new music giants will be born in
the coming turmoil.

Drawing from recent literature on the theory of bundling digital
goods, this article focuses on bundling of digital music and its competitive
implications. Bundling can be very effective as both a profit-maximizing tool
and as a competitive weapon. By analyzing how competition in the industry might
change, its attractiveness to new entrants and some bundling strategies for
competing in this market, this study finds that bundling will lead to
greater industry concentration and increasing market power for the large music
companies.Despite the disrupting
forces caused by digital technologies, the economics of bundling, the control
of content, and the existing industry structure suggest that the big labels
will retain their power and the industry will continue to be concentrated,
perhaps even becoming more so in the future.